How High-Risk NAICS Codes Affect Business

by Amanda Bailey Apr 05, 2023

Table of Contents:

1. Definition of High-Risk NAICS Codes
2. Importance of High-Risk NAICS Codes
3. Understanding High-Risk NAICS Codes

• Overview of NAICS
• High-Risk NAICS Codes Defined
• Determining High-Risk NAICS Codes

    4. The Impact of High-Risk NAICS Codes on Business

• Difficulty Obtaining Financing
• Higher Insurance Costs
• Limited Access to Contracts
• Increased Scrutiny from Regulators

   5. Managing the Risk of High-Risk NAICS Codes

• Diversifying Products or Services
• Improving Financial Stability
• Securing Appropriate Insurance
• Building Strong Relationships with Regulators

   6. Conclusion

   7. FAQs

As a business owner or operator, it's essential to understand the various risks that can impact your operations. One risk that may take time to be obvious is the impact of high-risk NAICS codes. The government uses these codes to classify businesses by industry; specific industries are considered higher risk than others. In this article, we'll examine how high-risk NAICS codes can affect businesses and what steps can be taken to mitigate these risks.

   A. Definition of High-Risk NAICS Codes

Before we dive into the details, let's first define what we mean by high-risk NAICS codes. NAICS stands for the North American Industry Classification System, used by government agencies to classify businesses by industry. High-risk NAICS codes refer to industries considered riskier than others, either due to the nature of the industry itself or other factors such as regulatory scrutiny.

   B. Importance of High-Risk NAICS Codes

Understanding high-risk NAICS codes are essential for a few reasons:

1. It can impact a business's ability to obtain financing, as lenders may hesitate to lend to businesses in high-risk industries.
2. It can impact insurance costs and contract access, as some companies may be reluctant to work with businesses in high-risk industries.
3. Businesses in high-risk industries may be subject to increased regulatory scrutiny, which can be costly and time-consuming.

Understanding High-Risk NAICS Codes

    A. Overview of NAICS

To better understand high-risk NAICS codes, it's essential to understand the NAICS system as a whole. NAICS is a classification system government agencies use to collect and analyze business data. It was developed jointly by the United States, Canada, and Mexico and is used to classify businesses by industry based on their primary economic activity.

    B. High-Risk NAICS Codes Defined

High-risk NAICS codes are those that are considered riskier than others. The exact definition of high-risk can vary depending on the agency or organization using the classification system but generally refers to industries that are more prone to accidents or environmental hazards or have a higher likelihood of financial instability.

    C. Determining High-Risk NAICS Codes

Determining whether a business falls under a high-risk NAICS code can be tricky, as it can vary depending on the agency or organization using the classification system. However, some common examples of industries that

The Impact of High-Risk NAICS Codes on Business

    1. Difficulty Obtaining Financing

One of the most significant impacts of high-risk NAICS codes on businesses is the difficulty in obtaining financing. Lenders often need to learn to lend to businesses in high-risk industries, as the risk of default or bankruptcy is considered higher. This can make it more challenging for businesses in these industries to obtain the funding solutions they need to grow and expand.

    2. Higher Insurance Costs

Another impact of high-risk NAICS codes is the higher cost of insurance. Insurance companies typically charge higher premiums for businesses in high-risk industries, as the likelihood of accidents or other incidents is considered more significant. This can make it more difficult for businesses in these industries to manage their costs and maintain profitability.

    3. Limited Access to Contracts

Businesses in high-risk industries may also need more access to contracts, as some companies may hesitate to work with businesses in these industries. This can limit a business's ability to grow and expand, as they may need access to the same opportunities as businesses in lower-risk industries.

    4. Increased Scrutiny from Regulators

Finally, businesses in high-risk industries may be subject to increased scrutiny from regulators. This can be costly and time-consuming, as businesses may need to invest significant resources in complying with regulations and responding to inquiries from regulatory agencies.

Managing the Risk of High-Risk NAICS Codes

   1. Diversifying Products or Services

One way to manage the risk of operating in a high-risk NAICS code industry is to diversify the products or services the business offers. This can spread the risk across a broader range of offerings, reducing the impact of any one industry on the overall business.

    2. Improving Financial Stability

Another way to manage risk is to improve the business's financial stability. This can be done by maintaining substantial cash reserves, carefully managing expenses, and investing in assets that generate steady revenue streams.

    3.Securing Appropriate Insurance

Businesses in high-risk industries should also take steps to secure appropriate insurance coverage. This may require working with specialized insurance providers who understand the industry's unique risks and can provide tailored coverage to meet the needs of the business.

    4. Building Strong Relationships with Regulators

Finally, businesses in high-risk industries should consider investing in building strong relationships with regulators. This can help demonstrate the business's commitment to compliance and make it easier to navigate the regulatory landscape when issues arise.

Conclusion

Operating in a high-risk NAICS code industry can be challenging, but with careful planning and management, businesses can mitigate the risks and succeed. By diversifying their offerings, improving financial stability, securing appropriate insurance coverage, and building solid relationships with regulators, businesses can position themselves for long-term growth and profitability.

FAQs

Ques 1. What are some examples of industries with high-risk NAICS codes?

Ans. Some examples of high-risk NAICS codes include mining, transportation, and waste management.

Ques 2. How can a business determine if it falls under a high-risk NAICS code?

Ans. Businesses can use the NAICS code lookup tool the US Census Bureau provided to determine their industry classification.

Ques 3. Can a business still be successful if it operates in a high-risk NAICS code industry?

Ans. A business can still succeed in a high-risk industry with careful planning and management.

Ques 4. How can a business improve its financing chances in a high-risk NAICS code industry?

Ans. By demonstrating financial stability, diversifying offerings, and building solid relationships with lenders.

Ques 5. Can a business move to a lower-risk NAICS code?

Ans. A business can change its industry classification by changing its primary economic activity. However, this is only feasible for some businesses, as it may require significant changes to their operations.